Author Topic: ESPPs - Sell old stock, pay lower tax//sell new, pay higher tax on minimal gains  (Read 1345 times)

ReP

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Have there already been posts about this?

We have an ESPP and have been letting funds sit in it bc the stock is growing well. However now we are looking to move funds out - specifically to cover a large purchase we're making. I plan to simply do the math on lower taxes for all the "long term" shares vs higher tax on newer shares that have not had time to grow much yet. From just eyeballing it, it looks like selling the newer shares will have us paying the least tax.

Any other more complicated maths I need to think about before pulling the trigger?

ooeei

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Have there already been posts about this?

We have an ESPP and have been letting funds sit in it bc the stock is growing well. However now we are looking to move funds out - specifically to cover a large purchase we're making. I plan to simply do the math on lower taxes for all the "long term" shares vs higher tax on newer shares that have not had time to grow much yet. From just eyeballing it, it looks like selling the newer shares will have us paying the least tax.

Any other more complicated maths I need to think about before pulling the trigger?

You'll have to pay tax on all of it in the end, so selling whatever has the lowest tax rate first is the mathematically efficient decision if you plan on leaving some in the plan.

This may be complicated depending on specifics like if it pushes you to a higher tax bracket, you're going to have a super low income year when you plan on selling, you want to spread it over multiple years, etc, but in general selling the old long term gains stuff first is the right call, even though it ends with "more" taxes in the short term.


Basically if you sell the new stuff now, your old stuff will just gain more, and in the future have even more taxes to pay on it. In the meantime you will have paid a higher rate on your gains from the new stuff. You'll end up with the exact same amount of value regardless of which shares you cash out first, just in one case you're paying short term (high) capital gains on some of it.
« Last Edit: March 14, 2018, 02:29:13 PM by ooeei »

MDM

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Usually, the correct strategy is to sell the lots with the lowest long term capital gain that give you the desired amount of net income.

Unless you have an unusual situation, that's probably best for you.

ReP

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Thanks!

seattlecyclone

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A related piece of general advice is not to let much money pile up in your employer's stock. It's usually best to take the ESPP discount, get out as soon as you can, and diversify.

Judicator

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A related piece of general advice is not to let much money pile up in your employer's stock. It's usually best to take the ESPP discount, get out as soon as you can, and diversify.

THIS. I would actually recommend selling all of your stock as soon as it becomes eligible for long term capital gains, since the amount of human capital you have tied up in the company is already quite large.

seattlecyclone

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In general, don't even wait for long-term gains. With an ESPP, the discount you get on the shares counts as regular income. The only capital gains component will be the change in value between your purchase date and your sale date. If you sell immediately, this amount should be roughly zero.

If you've already held the stock for a few months and it has gone up a bit, you might find it advantageous to wait until the long-term gains rate kicks in for those shares. Going forward, selling immediately is a good practice.

chadat23

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I'm going to play devil's advocate here and say that if you have reason to believe that the company's stock price is going to go up dramatically in the future and are only earning a trivial amount from your ESPP if you cash out quickly, then it much be worth holding onto a chunk.

I'll add that my perspective's biased because, while I funded half of a house in a reasonably priced market by being, maybe patient, maybe naive, and then cashing out my stock options, I could have paid for a whole house if I'd only waited a year or so.

seattlecyclone

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Yes, if you have information the rest of the market doesn't about your company and its future earnings, you might do better by holding on to your ESPP shares.

On the other hand, you probably don't have any such information. If you do, your company's lawyers should have already given you strong advice not to make transactions in the stock without taking certain precautions to avoid insider trading charges.

chadat23

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For the record, I'm not talking about or encouraging insider trading.

I was just fortunate to be at a company when it was very much transitioning from being a smaller player in a growing market to being the industry leader.

seattlecyclone

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Plenty of companies are trying to become leaders in their industry at any given time. Some of them make it. Many don't. The various analysts who follow the company's stock for a living have assessed the publicly available data, determined how likely they think each outcome is, and set the stock price accordingly. If you think they have mispriced it, chances are you either have nonpublic information or you are being overly optimistic, discounting the probability of failure.